According to a special report published today on Brazil, Fitch Ratings believes that the country’s current slowdown is cyclical in nature and that economic growth is likely to return to its potential rate. Fitch notes that Brazil’s sources of economic growth have not suffered a structural deterioration in their growth trend and, to the contrary, continue to increase at a sustained pace, which is notably the case for Total Factor Productivity.

‘An established record of prudent economic management combined with structural reforms such as privatizations and trade liberalization have boosted productivity gains and capital stock accumulation, leading Brazil’s potential growth rate to increase to around 4% from its average 2.3% in the 1990s,’ said Shelly Shetty, Head of Fitch’s Latin America Sovereigns Group.

‘Higher domestic savings and investment rates, a reduction in cost of doing business and further development of long-term credit markets are needed to improve Brazil’s growth prospects further,’ added Shetty. The medium-term growth trajectory needs to improve to enhance Brazil’s overall wealth and improve fiscal flexibility over time.

With the overheating of the economy prompting authorities to tighten monetary and fiscal policies and the country facing an unfavorable external environment, GDP growth decelerated sharply to 2.7% in 2011 from 7.5% in 2010. Aggressive monetary easing, the elimination of certain macro prudential measures aimed at curbing credit growth and a significant increase in the minimum wage should allow for a moderate economic recovery amid global sluggishness, with growth forecasted to reach 3.2% in 2012.

The special comment ‘Brazil’s Current Economic Slowdown is Cyclical’ is available at ‘www.fitchratings.com‘.

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